Japan’s Nikkei index plummeted more than 950 points on Tuesday, its biggest loss in one day since May 2013, as the fears over the global economy saw a continuation of the previous day’s selloff in Europe and the US.

The Nikkei dived 5.1% to 16,132.25 in morning trading and extended losses into the afternoon, while Australia’s S&P/ASX 200 fell 2.6% to 4,946.70. Markets were also down in the Philippines, Indonesia, Thailand and New Zealand. The yen meanwhile briefly soared to a 14-month high against the US dollar.

Fears over weak growth prompt global stock markets to fall

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The MSCI’s index of Asia-Pacific shares outside Japan fell 1% and might have fallen further had several Asian markets not been closed.

Markets in China, Hong Kong, Taiwan and South Korea were closed for Lunar New Year holidays. Most markets in the region will re-open from Wednesday, with Chinese markets returning next week.

The volatility affecting global markets last month appears set to continue amid concern about Chinese economic growth, falling oil prices and speculation that the US federal reserve could change course with interest rates.

“The combination of concerns that the United States could be heading toward a recession and the global stock sell-off is curbing risk appetite and is sending investors to the safe-haven yen,” Takuya Takahashi, senior strategist at Daiwa Securities, told Kyodo News.

After hovering around the 117-yen line on Monday, the Japanese currency briefly rose to the upper 114 zone to its strongest level against the dollar since November 2014. Investors regard the yen as a “save haven” currency when global markets are hit by the kind of turmoil witnessed in recent weeks.

The yen is expected to make further gains – a trend that eats into the repatriated profits of Japanese auto and other exporters. Three-month dollar/yen implied volatility – which indicates how much currency movement is expected in the months ahead - reached 12.137% its highest since September 2013.

Responding to the yen’s rise, Japan’s finance minister, Taro Aso, told reporters: “It is clear that recent moves in the market have been rough. We will continue to carefully monitor developments in the currency market.”

The dollar was last at 115.26 yen, down 0.6%, after dropping as low as 114.75.

Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo, described it as a “panic situation”.

Ogino added that investors would be closely watching the US federal reserve chair Janet Yellen’s testimony to the house financial services committee on Wednesday for any clues that the central bank might be prepared to slow future rate hikes as market turbulence and global economic uncertainty continue.

“The focus is now on Yellen’s comments tomorrow, and how she’ll respond to these latest market conditions,” Ogino said.

The flight to safety also saw Japanese government bond yields dive below zero for the first time, extending a downtrend sparked by the Bank of Japan’s surprise move last month to adopt negative interest rates on some commercial lenders’ deposits.

“The Nikkei has been well and truly savaged today,” said Chris Weston, chief markets strategist at IG in Melbourne. “It is clear that strong buying in the Japanese government bond market is not going to drive the (yen) weaker in times of extreme volatility, so negative rates have little bearing on markets.”

The Bank of Japan’s rates decision has prompted fears that after years of monetary easing, central banks have few avenues left to explore to encourage investment and boost growth.

Talk of an impending recession in the US, however, is creating speculation among investors that the federal reserve will put on hold its attempts to normalise rates.

“The ‘fear factor’ in markets has morphed from being about an emerging market hard-landing and collapsing oil prices to being about the extent of the slowdown in the developed world and the ability of central banks to reflate asset values yet again,” said analysts at Citi in a note.

The pessimism isn’t universal, however. In a report released at the weekend, Goldman Sachs said there was just a 25% risk that recession would hit industrialised economies in the next year, rising to 34% over the next two years.

Both forecasts fall below the average risk seen in the past 35 years, despite the turmoil in financial markets. In the US, the probability of a recession in the next four quarters is just 18%, and 24 in the eurozone, according to the US bank’s economics team.